After last week’s big disappointment that prices are starting to rise again, stock and bond prices dipped.
If interest rates are breaking out to higher levels in the short-term, that opens a window for a “flash crash” in the market similar to 2018 when stocks dropped 20% in a month.
That is a line in the sand for the S&P 500 index (Ticker: SPX). If it is broken, the risk of a short-term crash becomes very real.
Today, I’ll lay out a plan to trade this crash potential so you can make money and be ready for the big trend I see in the weeks ahead.
Live and Trade With Passion My Friend,
QE & the 2018 Housing Crisis
Ben Bernanke invented quantitative easing, or QE, to save the banking system during the 2008 great financial crisis.
The bailout of US banks alone needed a trillion dollars and QE gave the Fed a tool that could immediately inject dollars into the banks and the markets.
All that new money injected into the system fueled inflation … and by 2018 the Fed began an aggressive tightening cycle to remove cash in the system, which drove stock prices lower.
Notice the chart below showing the SPX during the 2018 tightening period that created a 20% crash ending on Christmas Eve. It was called the Christmas Massacre.
Like most tightening cycles, the ending does not come until the Fed goes too far, creating the crash scenario.
This will happen again during 2023. It is just a matter of what comes first …
- Do we get a melt-up first, fueled by the China reopening and Fed pause of tightening? Or …
- Do we get a crash caused by a bond market meltdown and debt ceiling crisis?
We will get clues on either scenario by analyzing the changes in longer-term and daily expiry option positioning.
The massive rise in daily expiry option volumes has added risk to a market crash, which can occur if dealers get caught with too much negative gamma, or short puts/short stock positions.
The risk is dealers build a large negative gamma book and we get a large drop driven by daily expiry put option buying. This forces dealers to sell a lot of stock into a falling market, triggering a crash.
What’s the Trade?
I give the edge to SPX holding the 3950-4000 on a test and for the market to continue higher in the weeks ahead. That’s basedon on the better economic numbers recently and China reopening.
My one caveat is if we see SPX go below the 3950. Notice the strong support for SPX from the 4000 strike and then the 50-day moving average (blue line) at 3970 and the 200 dma (red line) at 3950.
Stay tuned because I think we should see a test lower early in the week and get a look at the investor demand below.
Live and Trade With Passion My Friend,
Griff